Earnings Call: H1 2020

Nov 21, 2019

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy interim results briefing for fiscal year 2019 and 2020. Before we start, we would like to introduce you the senior management of Vitasoy Group. Sitting in the middle of the head table, we have Mr. Winston Lo, Executive Chairman of Vitasoy Group. Good afternoon. On his right-hand side, we have Mr. Roberto Guidetti, our Group Chief Executive Officer. Good afternoon. On the left-hand side of Mr. Lo, we have Mr. Chris Lau, Group Chief Financial Officer. Good afternoon. In the following presentation, we will first have Chris to provide us with a review on the company's financial performance, followed by Roberto's presentations on the business review in different markets and outlook. We will then have a Q&A session. Now let's invite Chris to speak to us, please. Thank you. Good afternoon, ladies and gentlemen. Welcome to our interim results announcement briefing. Now, before we start our presentation, I would like to draw your attention to this disclaimer regarding the forward-looking statements in this presentation. Okay. Let's start off with looking at our financial performance for the interim period. Now, in the first half of this financial year, we continued to deliver growth in both revenue and profit at a more moderate rate than last year. As anticipated to you in our June 2019 announcement, we grew revenue by 5% in HKD and 9% net of FX impact. This growth is building on top of the exceptional 22% increase that we achieved during the same period last year. Unfavorable currency variation, particularly for the RMB and also Australian dollar, affected our results after translating the results into HKD. Looking at the gross margin, gross margin increased by 1 percentage point to 55% as a result of improved manufacturing efficiency and favorable trend of commodity prices, particularly for sugar and paper packaging. EBITDA for the interim period was around HKD 900 million, increased by 9%. The increase of EBITDA was mainly driven by higher gross profit. Profit before tax increased by 1% to HKD 730 million. Profit to shareholders grew by 3% in Hong Kong dollar, but by 7% net of Forex impact. As a result, the basic earnings per share increased 3% to 50.2 Hong Kong cents. In view of the group's solid underlying financial performance, the board of directors has declared an interim dividend of Hong Kong 3.8 cents per ordinary share for the six months ended 30th September 2019. Let's move on to CapEx. Capital expenditure incurred during the period was HKD 413 million, staying at a high level to support future business growth. The CapEx was mainly related to the acquisition of production equipment for the new plant in Dongguan, and also the new production lines and upgrades of existing production machineries in both Hong Kong and mainland China. Financial position. The financial position of the group remains strong. As at 30th September 2019, our cash and bank deposit decreased by 16% to HKD 849 million. Our borrowings increased by 7% to HKD 48 million for financing CapEx to meet future demand. As such, the gearing ratio of the group increased to 10% at the end of September 2019. But if we exclude the lease liabilities due to the new application of HKFRS 16, this year from the total borrowings, the gearing ratio as of September 2019 would be 2%. Compare in a like for like basis, it's actually 2% after you take off the impact of the new accounting standard, lease 16. The group's return on capital employed, ROCE, slightly decreased to 25% as at 30th September 2019. This ends the first section of the presentation. I would like to invite our group CEO, Mr. Roberto Guidetti, to share with you the by market review and the upcoming outlook of the group's business. Thank you. Thank you, Chris, and good afternoon to all of you. And again, welcome to the session. Let me share with you the top-line review of our business overall and by geography. As Chris said just now, in the first half of fiscal year 2019-20, we continued to deliver growth in both revenue and profit, albeit at a more moderate rate than last year, as we anticipated to you in our June 2019 announcement. I would like to emphasize that whilst our revenue and profit grew by 5% and 1% in Hong Kong dollars, in local currency, net of currency exchange impact, we actually grew much faster at 9% and 5%, respectively. And that this increase is building on top of the exceptional 22% and 26% growth we achieved during the same period last year. Unfavorable currency variations, renminbi and Australian dollar in particular, affected our results overall. On the operating profit side, our slower growth rate versus revenue is in line with what we anticipated to you in our June announcement. In local currency, RMB, mainland China grew more moderately, albeit still strongly at 14%, outperforming the market average. Note that this comes on top of our 30% growth, which was a record last year. Profit-wise, China delivered a 13% growth. Hong Kong was stable in revenue but down in profit as we complete the final phase of our manufacturing and logistics reconfiguration program. Australia was 1% up in revenue in local currency, but down 17% on operating profit. This is due to the unusual severity of the 2019 drought that disrupted soybean supply and significantly increased our raw material costs. This has started to impact us in the first half of the fiscal year and will continue in the second half of the fiscal year, whilst we have implemented mitigation plans on sourcing and expenditures. Singapore was +4% in revenue in local currency, but down 75% on operating profit due to the strengthening of our management resourcing on our journey to scale up this operation. If we look forward, in the second half of the fiscal year, we are determined to sustain growth in mainland China in the context of slower performance in Hong Kong and Australia. We stay confident in our long-term growth prospects, given the ever more favorable trends towards plant-based products and our business model differentiation, scale, and expertise. Let me please move to the results overview by geography. All currencies moved unfavorably to us, as we said, but we did continue to grow our market positions in local currency. For the impact on operating profit, as anticipated in June, we increased spending and advertising and organizational building to continue strengthening equity and presence in our markets. As a result of all this, mainland China is now 70% of our group's total revenue, followed by Hong Kong at 24% and Australia and New Zealand at 5%. On the profit side, China's proportion is slightly higher, 74% of total than of the revenue, given the decline in other regions. Let me therefore start our segmental review with the mainland China business. Coming on top of last year's record growth of 30%, revenue RMB grew by 14%, with growth that was balanced for both of our core brands, Vitasoy and VITA. Whilst we grew more moderately than in the past, as we delayed some new initiatives and completed important organizational structural changes, we stay confident on our long-term prospects. This is because the markets we compete are growing, and the premium quality segment has momentum thanks to the shoppers' increased interest, but also new competitive entries, which are driving much higher categories awareness and trial. The profit growth was in line with the revenue at 13% in RMB. Behind improved gross profit margin, while partly offset by increased advertising and promotional expenses. We are determined to sustain our growth trajectory in the second half of the fiscal year. As previously mentioned, when we met in June, we will maintain a higher spending and investment level to drive our brand equity and execution as we scale up. Our construction program of our new plant in Dongguan is progressing ahead of our plan and is expected to commence production in mid 2020. Production from the Shenzhen plant will gradually migrate to the new Dongguan plant. Let me now review the progress in our home base, Hong Kong. In Hong Kong, our revenue was on par versus the previous interim period, whilst profit decreased in the final phase of our manufacturing and logistic reconfiguration program. Our core plant milk and tea businesses stay strong. Whilst we have experienced slower than expected execution in some parts of our innovation program. Our innovation program is very important, and it affects our results because our very developed Hong Kong business relies disproportionately on product innovation for growth. We are determined to progressively restore our growth trajectory going forward. One of the innovations that shoppers have welcomed in Hong Kong has been our extending no sugar options throughout all our main brand platforms. Among these, we have recently introduced a new no sugar Vitasoy Classic. This is the product that we are sampling today. We hope you like it and share the word. We will continue to develop innovative products to cater to this increasingly health-conscious and sustainable consumption trend. I would like to talk about our overseas businesses now, starting from Australia and New Zealand. In Australia and New Zealand, we grew revenue 1% in Australian dollars, while the operating profit decreased by 17%. As Australian dollar depreciated, in HKD terms, revenue and profit decreased by 6% and 23% respectively. This semester was very unusual. The especially severe drought in Australia affected our crop harvest, disrupting our sourcing of local soybeans, hindering our ability to maintain supply to customers on our soy platforms, and also increasing our material costs. Unfortunately, we expect this negative impact will continue in the second half of the fiscal year, while we work to restore stable and cost-efficient supply on organic beans. On the positive side, we continue to reinforce our plant milk leadership, also thanks to acceleration of progress in the almond segment in Australia. Let me now close the segmental review by covering our Southeast Asian market, starting from Singapore, where we grew revenue by 2% in HKD and 4% in local currency, mainly driven by strong performance of our core tofu business. While we continue to grow our beverage portfolio to enable scale-up acceleration. Operating profit declined due to increased investments in listing fees, advertising, and also strengthening of our management resourcing in Singapore. To close the by-market review, just a brief update on our business in the Philippines, where you are aware we have a joint venture with URC, in the Philippines. This joint venture continues to drive Vitasoy awareness and product trial. We are confident on the business in the long run, given the low per capita consumption level of the soy category and the increased consumer interest. However, it is also clear this will be a continuous and gradual step-by-step progress. Our business has so far been sourced from Hong Kong. We have invested with URC to build our first production line locally in the Philippines, which is expected to commence in 2020, next year. In summary, our first half continued to deliver growth in both revenue and profit, albeit at a more moderate rate than last year. Net of the currency impact, the revenue and operating profit grew 9% and 5% respectively, coming on top of the exceptional 22% and 26% growth that we achieved during the same period last year. Unfavorable currency variations, in particular the RMB and the Australian dollars, affected our results overall. On the operating profit side, our slower growth rate versus the revenue is in line with what we had anticipated to you in our June announcement. Mainland China grew more moderately at 14%, but this 14%, if you're looking at how the market is growing, did outperform the market average in China. Note that this comes on top of our 30% record growth last year. Profit-wise, China delivered 13% growth, which is in line with the revenue growth. Hong Kong was stable in revenue, down in profit as we complete the final phase of our manufacturing and logistic reconfiguration program. Australia, we saw it was up 1% in revenue in local currency, but down 17% in operating profit. A severe drought disrupted the soybean supply and increased our raw material costs. This has started to impact us in the first half of the fiscal year and will continue in the second half of the fiscal year, while at the same time, we've implemented mitigation plans on sourcing and on expenditures. Singapore was up 4% in revenue in local currency, but down on operating profit by 75% due to the strengthening of our management resourcing on our journey to scale up the operation. If we look forward in the second half of the fiscal year, we are determined to sustain performance and secure continued growth in our mainland China business. Overall, we remain confident in our long-term growth prospects by driving a portfolio of tasty, nutritious, and sustainable products. That's the end of our presentation, and we're open to then engage in Q&A. Thank you